The Pitfalls of Imputing Income

Finding the Proof

For purposes of child and spousal support, “[a] court need not rely upon a party's own account of his finances, but may impute income based upon the party's past income or demonstrated future potential earnings.” Duffy v. Duffy, 84 AD3d 1151, 1151-52 (2d Dept. 2011) (citations omitted). The court may impute income to a party using numerous sources, including evidence of money received from friends and relatives and the party's employment history, future earning capacity, and educational background. In fact, “[w]here a party's account is not believable, the court may impute a true or potential income higher than alleged.” Id. (citations omitted).

Courts can impute income when they believe that a party falsely reported income to the government. See Sena v. Sena, 65 AD3d 1244, 1245 (2d Dept. 2009) (imputing income where the father testified that he earned a salary of $350 per week but did not submit a pay stub, and testified that he was paid in cash; the father also claimed various business expenses but did not present proof of them); Liebman v. Liebman, 229 AD2d 778, 779 (3d Dept. 1996) (imputing income where a man received business income that he did not declare, reported business expenses for which he was reimbursed, reported business expenses that were actually personal expenditures, and where the pre-separation lifestyle was more comfortable than would have been expected based on reported income).

Courts can also impute income to account for the amount of income a party could earn ' not necessarily the amount the party reports as earned. For example, in Karas-Abraham v. Abraham, 69 AD3d 428 (1st Dept. 2010), the court determined that the defendant hid income through his family's companies, his own business and illusory undocumented loans. It found that the defendant's standard of living was impossible to maintain based on the income he claimed in the divorce proceeding and on his personal tax returns. The court also considered the defendant's lack of candor with respect to his income, the parties' lifestyle, the custodial parent's financial resources and the needs of the children.

Similarly, in Fabrikant v. Fabrikant, 62 AD3d 585 (1st Dept. 2009), the court affirmed a finding of imputed income where the defendant was purportedly loaned money to pay bills from corporations owned by the defendant but there was no documentation to support the alleged loans. The forensic accountant in that case concluded that the companies' cash flows were not reflected on their income tax returns and that there was a deliberate effort by the defendant to reduce his apparent income to avoid his support obligations. Last, the court also affirmed imputation of income based on the pattern of substantial gifts to the defendant from his father.

Lavish Lifestyles

A lavish pre-separation lifestyle that is inconsistent with reported income can also form the basis for imputation. See DeSouza-Brown v. Brown, 71 AD3d 946 (2d Dept. 2010) (imputing income for child support calculation where the defendant's expenses listed in the statement of net worth far exceeded his income as reported in his tax returns); Bruce L. v. Patricia C., 62 AD3d 566, 567 (1st Dept. 2009) (affirming imputed income based on disparity between admitted monthly expenses and Social Security disability benefits); Ansour v. Ansour, 61 AD3d 536, 536 (1st Dept. 2009) (imputing income to defendant “in light of the court's finding that defendant was not forthcoming about [his interest in a limited partnership]“); Reilly v. Reilly, 298 AD2d 448, 449 (2d Dept. 2002) (“the Supreme Court was free to find that the defendant's actual income was greater than that reported in documents submitted to the court” (citations omitted); Sebag v. Sebag, 256 A.D.2d 401 (2d Dep't 1998) (same).

Family Assistance

Post-commencement courts can impute income based on a continuation of receipt of substantial assistance from the family. Blay v. Blay, 51 AD3d 1189 (3d Dept. 2008) (Imputing income based on money received from family members, free rent for the home and karate studio, numerous personal bills paid by the partnership or corporation and year-end business distributions made to family members); Ivani v. Ivani, 303 AD2d 639 (2d Dept. 2003) (affirming imputation of $130,000 in annual income based on evidence that personal expenses paid by corporation's accounts and other third parties and by the parties' relatively lavish pre-separation standard of living).

Conclusion

“Wads of cash” might either be evidence that the spouse is hiding income, or reflect funds legitimately received through employment and withdrawn from banks. Whether the presence of cash is evidence of malfeasance can be determined by comparing bank and credit card statements to determine where money is spent and whether, and to what extent, additional funds are spent on reasonable living expenses such as food, automobile operating costs, utilities, daily spending money, the employment of a housekeeper, clothing purchases, dining out, entertainment and vacation expenses. Indeed, even a down payment on a home and renovation expenses without any receipts can be evidence of additional cash income.

While courts have the ability to impute income for the reasons addressed above, judges differ in how much evidence they require to impute income for the purposes of pendente lite and permanent support. Moreover, while a successful imputation of income can substantially increase a support award, an unsuccessful attempt can result in large fees for a client who expected to receive a substantially larger support award. This danger is particularly prevalent where the support from imputation is derived primarily from the testimony of the payee spouse. Thus, care must always be taken, when deciding whether to pursue a claim, that the opposing spouse has more to offer than her or she is admitting to.

Carol W. Most, a member of this newsletter's Board of Editors, is a partner at Carol W. Most & Associates P.C., in White Plains. Adam W. Schneid is an attorney with the firm.

Too often, as attorneys in Family Law matters, we are faced with the questions presented when a couple's income does not match the lifestyle they have maintained, and the realization that cash income plays a role in that lifestyle. For example, we recently heard from a client that her husband “often came home from work with wads of cash.”

The issue to be resolved is the incongruity between the apparent lifestyle and the parties' inclusions of expenses on the Statement of Net Worth. A party may attempt to justify his alleged income by omitting various expenditures from his Statement of Net Worth. Frequently, reported income is inconsistent with the parties' bank records, credit card, utility and other payments, as when credit card payments indicated on credit card receipts do not match up with bank statements. Additionally, cash deposits may not be accountable as salary deposits.

How do we prove the existence of these extra funds to the court, in order to obtain a support award that is in keeping with the lifestyle the parties enjoyed prior to the break-up?

Finding the Proof

For purposes of child and spousal support, “[a] court need not rely upon a party's own account of his finances, but may impute income based upon the party's past income or demonstrated future potential earnings.” Duffy v. Duffy , 84 AD3d 1151, 1151-52 (2d Dept. 2011) (citations omitted). The court may impute income to a party using numerous sources, including evidence of money received from friends and relatives and the party's employment history, future earning capacity, and educational background. In fact, “[w]here a party's account is not believable, the court may impute a true or potential income higher than alleged.” Id. (citations omitted).

Courts can impute income when they believe that a party falsely reported income to the government. See Sena v. Sena , 65 AD3d 1244, 1245 (2d Dept. 2009) (imputing income where the father testified that he earned a salary of $350 per week but did not submit a pay stub, and testified that he was paid in cash; the father also claimed various business expenses but did not present proof of them); Liebman v. Liebman , 229 AD2d 778, 779 (3d Dept. 1996) (imputing income where a man received business income that he did not declare, reported business expenses for which he was reimbursed, reported business expenses that were actually personal expenditures, and where the pre-separation lifestyle was more comfortable than would have been expected based on reported income).

Courts can also impute income to account for the amount of income a party could earn ' not necessarily the amount the party reports as earned. For example, in Karas-Abraham v. Abraham , 69 AD3d 428 (1st Dept. 2010), the court determined that the defendant hid income through his family's companies, his own business and illusory undocumented loans. It found that the defendant's standard of living was impossible to maintain based on the income he claimed in the divorce proceeding and on his personal tax returns. The court also considered the defendant's lack of candor with respect to his income, the parties' lifestyle, the custodial parent's financial resources and the needs of the children.

Similarly, in Fabrikant v. Fabrikant , 62 AD3d 585 (1st Dept. 2009), the court affirmed a finding of imputed income where the defendant was purportedly loaned money to pay bills from corporations owned by the defendant but there was no documentation to support the alleged loans. The forensic accountant in that case concluded that the companies' cash flows were not reflected on their income tax returns and that there was a deliberate effort by the defendant to reduce his apparent income to avoid his support obligations. Last, the court also affirmed imputation of income based on the pattern of substantial gifts to the defendant from his father.

Lavish Lifestyles

A lavish pre-separation lifestyle that is inconsistent with reported income can also form the basis for imputation. See DeSouza-Brown v. Brown , 71 AD3d 946 (2d Dept. 2010) (imputing income for child support calculation where the defendant's expenses listed in the statement of net worth far exceeded his income as reported in his tax returns); Bruce L. v. Patricia C. , 62 AD3d 566, 567 (1st Dept. 2009) (affirming imputed income based on disparity between admitted monthly expenses and Social Security disability benefits); Ansour v. Ansour , 61 AD3d 536, 536 (1st Dept. 2009) (imputing income to defendant “in light of the court's finding that defendant was not forthcoming about [his interest in a limited partnership]“); Reilly v. Reilly , 298 AD2d 448, 449 (2d Dept. 2002) (“the Supreme Court was free to find that the defendant's actual income was greater than that reported in documents submitted to the court” (citations omitted); Sebag v. Sebag , 256 A.D.2d 401 (2d Dep't 1998) (same).

Family Assistance

Post-commencement courts can impute income based on a continuation of receipt of substantial assistance from the family. Blay v. Blay , 51 AD3d 1189 (3d Dept. 2008) (Imputing income based on money received from family members, free rent for the home and karate studio, numerous personal bills paid by the partnership or corporation and year-end business distributions made to family members); Ivani v. Ivani , 303 AD2d 639 (2d Dept. 2003) (affirming imputation of $130,000 in annual income based on evidence that personal expenses paid by corporation's accounts and other third parties and by the parties' relatively lavish pre-separation standard of living).

Conclusion

“Wads of cash” might either be evidence that the spouse is hiding income, or reflect funds legitimately received through employment and withdrawn from banks. Whether the presence of cash is evidence of malfeasance can be determined by comparing bank and credit card statements to determine where money is spent and whether, and to what extent, additional funds are spent on reasonable living expenses such as food, automobile operating costs, utilities, daily spending money, the employment of a housekeeper, clothing purchases, dining out, entertainment and vacation expenses. Indeed, even a down payment on a home and renovation expenses without any receipts can be evidence of additional cash income.

While courts have the ability to impute income for the reasons addressed above, judges differ in how much evidence they require to impute income for the purposes of pendente lite and permanent support. Moreover, while a successful imputation of income can substantially increase a support award, an unsuccessful attempt can result in large fees for a client who expected to receive a substantially larger support award. This danger is particularly prevalent where the support from imputation is derived primarily from the testimony of the payee spouse. Thus, care must always be taken, when deciding whether to pursue a claim, that the opposing spouse has more to offer than her or she is admitting to.

Carol W. Most, a member of this newsletter's Board of Editors, is a partner at Carol W. Most & Associates P.C., in White Plains. Adam W. Schneid is an attorney with the firm.